Factoid Valuation

*edit* July 24th, 2017** These first couple of years, the Factom (FCT) price will probably be driven primarily by speculation regarding the future use of the prototol rather than current EC usage. However, the below is still a worthwhile exercise regarding Factom’s price potential.

In my opinion, Factom is one of, if not the most undervalued cryptocurrencies due largely to misunderstanding and misinformation about the potential valuation of the Factoid (FCT) token.  Let me start by showcasing that YES, the value of the Factoid is meant to increase as use of the Factom protocol increases.  This is made clear by one of the founders and the Chief Architect of Factom, Paul Snow who answered the following question on Reddit:

Considering the Bill and Melinda Gates Foundation, the Department of Homeland Security, and a host of others are working with Factom to make use of their protocol and that huge names such as billionaire venture capitalist Tim Draper have invested in the company, we can assume with some degree of safety that it will be used.  A LOT.  And, as it’s expected to be widely adopted, the system has been designed to scale to handle BILLIONS of entries per day.  But why does Factom even have a token and why is there a SECOND token called “Entry Credits”?

Factom needs Factoids to allow decentralization, as an anti-spam measure (making submissions to the blockchain prohibitively expensive if it’s junk), and to pay the 64 Federated Servers (somewhat like DASH Masternodes, they perform specialized services for the network and are compensated with FCT).  VERY simplistically speaking, Factom secures data and makes it easily auditable.  Actually, Factom can do SO MUCH MORE, but that’s not the purpose of this article.  For example, Factom has developed a product called Harmony which is aimed at the mortgage industry and has been VERY well received according to early reports.  If you’re a mortgage giant that understands that Factom can save you a ton of money, improve efficiency, and make your data easily auditable which makes compliance with burdensome laws much simpler, you’re going to be interested.  However, many companies either don’t want to, or are not allowed to purchase and hold cryptocurrencies.  In addition, a company needs to be able to budget for use of a product and if a required cryptocurrency is highly volatile in price, that’s next to impossible.  That’s where, “Entry Credits” (EC) come in. EC are created by burning Factoids and one EC allows a company to secure up to 1kb of data into the Factom blockchain.  EC are non-transferable and their price is currently fixed at $.001 each.  With a fixed price of $.001 regardless of the fluctuating price of FCT, companies can easily budget for using the Factom protocol.  If a company needs 1,000 Entry Credits, it should cost them $1.00 whether a Factoid is $1.00 or $100.00 and companies like this, a LOT.  They also like that they don’t have to signup for exchanges like Poloniex to acquire Factoids, they can bypass that step and purchase Entry Credits from a store which converts FCT into EC for them.  Companies appreciate this as it reduces risk and compliance issues.  This is the genius of Entry Credits.

What makes Factoids go up in price?  Absent speculation which we know there will be a lot of, usage of the Factom protocol should make Factoids go up in price as Paul Snow said above.  There are 64 Federated Servers which allow for the decentralization of the Factom protocol that need compensation for their services.  When a Factoid is used for Entry Credits, it is burned (no longer exists).  However, once Milestone 3 is reached (Factom is nearing completion of Milestone 2 (M2) and Milestone 3 (M3) is estimated to be a year or more out), approximately 73,000 new Factoids will be created per month to pay the Federated Servers.

The idea is that you don’t want the number of outstanding Factoids to drop (deflation) nor do you want huge inflation, so, over time, the price (absent speculation) will find an equilibrium where around 73,000 Factoids per month are being burned and created so that there is neither inflation nor deflation.  This means that as the protocol is used more, the price of Factoids have to increase.  In fact, there’s an equation for it:

(e*r)/i
e = new entries per month * r = FCT to EC conversion rate, $0.001 / i = monthly inflation, 73k FCT

While current EC usage isn’t high, let’s assume in the future that there are 30 billion new entries per month which is within the realm of possibility as large companies signup to use Factom.  And yes, there are huge companies that need billions of records secured as David Johnson, Chairman of the Board of Factom states in this interview:

We could literally wakeup tomorrow to news of a big contract considering the CEO of Factom recently said they are in contract negotiations with three very large financial institutions:

Moving onto the equation:

(30,000,000,000 * .001) / 73,000 = $410.95

That means, in order for there not to be deflation, the Factoid price would have to be $410.95.  And that is absent speculation about future increases of the use of the protocol.  And as with any tradeable asset, there is ALWAYS speculation.  This base price doesn’t take into consideration speculation, which in public markets is usually around 10-15x—crypto’s rough equivalent to the P/E ratio—the base price. Early-market “startups” like Factom often go magnitudes higher depending on market sentiment and expectations for growth. Even mature companies often reach magnitudes of value above their yearly earnings, for instance Amazon=847x, Netflix=282x, etc. And these are mature companies, with much more limited growth potential.

What is the current price as of FCT as of this writing?

$13.17

Come discuss Factom with others on the Factom Slack: https://factom-slack.herokuapp.com/

Disclaimer: I own Factoids and am no doubt biased.  Please do your own research as this is simply my opinion and there may be aspects to Factom that I don’t yet understand. For example, it’s possible that EC usage from even large companies may not be that high. There are many unknowns.

4 thoughts on “Factoid Valuation”

  1. Wow. Really appreciate taking the time and coming up with such a nice evaluation of the factom project!

    Very much appreciated!
    cheers

  2. “once Milestone 3 is reached (Factom is nearing completion of Milestone 2 (M2) and Milestone 3 (M3) is estimated to be a year out) then approximately 73,000 new Factoids will be created per month to pay the Federated Servers. The idea is that you don’t want the number of outstanding Factoids to drop (deflation) nor do you want huge inflation, so, over time, the price (absent speculation) will find an equilibrium where around 73,000 Factoids per month are being burned and created so there is neither inflation nor deflation.”

    So my understanding of the development timeline and underlying tech in general is almost non existent with regards to Factom. I’m simply interested in the product from a trader’s perspective at the moment, and I understand that Factom has massive potential use cases among large corporations/governments in particular. So out of curiosity, I’m wondering where these 73,000 new FCT will be coming from every month. Are they simply released by the company? And is the 73,000 a fixed number based on blockchain protocol or can it be adjusted at will? Also I’m curious why your natural assumption is that an equilibrium will be reached when comparing FCT created/destroyed each month. If lots of large companies start heavily relying on Factom and thus subsequently burn a lot of FCT to create EC, then couldn’t the number of FCT destroyed easily outpace the creation of new FCT regardless of what is “ideal” to stabilize the market and deflation?

    1. Greetings,

      The ~73,000 is created by the protocol as defined by the whitepaper: https://github.com/FactomProject/FactomDocs/blob/master/whitepaper.md — note that this doesn’t happen until M3. The way I understand it, this number will be fixed.

      Every time a Factoid is burned for Entry Credits right now, it is gone forever. As such, if a company began using tons of EC tomorrow, we could drop overall supply quite a bit until M3 rolled around. My assumptions come from discussions with the developers of Factom. They’ve designed it so that it will find an equilibrium. Will it? Time will tell I guess! I can certainly see it being theoretically possible that more than 73,000 Factoids are burned per month, but one of the developers would be better to talk to about this. They’re pretty accessible on the Factom Slack.

  3. When FCT gets added to another exchange this coin will go hyper space to new highs, polo has majority of coins this one of the main reasons why its undervalued

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